Your Customer is Not Paying His Bill. What Do You Do Now?

You've done everything you're supposed to do. You've held up your part of the bargain. You sent out an invoice at the first of the month. You sent a reminder two weeks later. You sent out an invoice the next month with "PAST DUE" stamped in red. You sent out another with "FINAL NOTICE". You have sent dunning letters threatening collection agents and lawsuits. What now?

• Have you tried telephoning your debtor? The squeaky wheel gets the grease.
• Look at your contract. Did anybody co-sign with the debtor? Did anybody sign a guaranty of payment? It may be time to put the squeeze on them.
• Did one of your customers, friends or family refer this debtor to you? You could try to get them to intercede for you.

They're still not paying. Now what?

Caveat. The author is an attorney in the state of Kentucky. The information contained herein may differ from jurisdiction to jurisdiction. By providing this information, the author does not intend to create an attorney-client relationship with the reader. The following is not legal or financial advice. If you have legal questions about any of the material presented below, please contact an attorney in your jurisdiction.

Skip Tracing

Is the mail coming back to you? You may need to do some skip tracing to find the guy. There are many options available to you for skip tracing. In the previous chapter, we discussed the importance of collecting information prior to extending credit. Having the name, address, SSN, date of birth, employment information and other identifiers will help you tremendously in skip tracing. If this only happens on occasion, try some of the simpler, less expensive alternatives first.

• In this high-tech world, it's easy to ignore the obvious. Pick up the phone book and see if your debtor's new address is listed. If you get a few dollars into skip tracing and realize you haven't tried it, this can be a real forehead slap.

• Print "Address Correction Requested" on all of your billing envelopes. That way, if one of your debtors moves, the post office will notify you of the change of address. You will have to pay some postage for the service, but it beats losing the account.

• Ask the Post Office for Change of Address information. If you have an acceptable purpose (like collecting a debt) the Post office will provide change of address information on request. You will have to fill out a form and send it to the post office servicing your debtor's last address.

• Online databases. There are some online databases that provide information useful in tracking debtors. You have to certify that you have an acceptable purpose under the law to access this private information. Some of them are good, and some of them are garbage. I use accurint.com. It seems to do pretty well.

• Investigators. Some of us are old enough to remember Jim Rockford, the private investigator from the Rockford Files. He charged his clients $200.00 a day plus expenses. Whenever I suggest an investigator to my clients, they panic, thinking about the costs. While investigators can be costly, they may be able to do some simple computerized skip tracing or track someone down on the phone for less than what you think. We will talk about process servers and special bailiffs later on. They will have resources available to track people down. That's their job. Call around for prices.

Make Sure the Investment is Worth the Payoff.

When you're tracking someone down, make sure that the cost and effort you spend is commensurate with the value of actually finding them. If the debt is low, or if the chances of collecting a penny from your debtor are low, don't throw good money after bad.

A lot of times my clients will tell me, "It's the principle of the thing". It's not. If you're debtor isn't paying you, let me assure you they know exactly what they're doing. They either feel very guilty about not being able to pay you, or they don't. Either way, trying to teach them a lesson about paying their debts is an exercise in futility that would either be wholly unnecessary or lost on oblivious debtors.

Collection is about making oneself whole. It's about protecting your business. It's about realizing income from your efforts. It's not about teaching a lesson. If you want to be a teacher, the wonderful teachers in our school systems could use an extra hand. If you want to run a business, you need to be aware of your costs as well as your income.

To Sue or Not To Sue

Many of my clients who hire me to collect an account tell me that it's imperative that they win. In reality, they have already lost before they ever came into my office. Any credit transaction is a gamble that your debtor will actually pay you for the good or service you sold to him. You have lost the gamble. The score is two to zip. Your client kept his money and whatever good or service you have given to him. The game is over. Thanks for playing. A lawsuit is your challenge to a rematch.

But this rematch won't be anything like the first game. You will have an uphill battle. You will have to file the lawsuit, pay the costs, find the debtor, have him served with process, and prove your case. And at the end, the best you can hope for is a tie score-you get paid for the value you have already given in the previous game. You may end up with less than a full point. Or you could lose again. Or you could spend more money than you recover in the judgment.

So before you sue your client, you have to look at the account and determine if it's worth the lawsuit. Look at:

• How much money is at stake?
• What are the chances of collecting it from this particular debtor?
• How complicated is the case? Will it involve multiple witnesses, depositions, and costly litigation, or will it likely be a default judgment for debtor's failure to defend?
• Regardless of your chances at collection, do you want to put your debtors on notice that you will aggressively pursue collection of your accounts, even if it means that you pay more in costs and fees than what you eventually collect? How much impact will this aggressive attitude actually have on your debtors?

Judgment-Proof Blues

How many times have you heard a debtor tell you that you can't squeeze blood from a turnip? "Come on over," they say in desperation. "Take everything I have, because I don't have anything. You're welcome to look for yourself." They're trying to signal to you that they are judgment -proof; that even if you are 100% successful in your litigation, your judgment will be worthless because he has no income or assets with which to satisfy your judgment.

In this regard, debtors are usually prone to hyperbole. However, the concern is very real. You should look at your debtor and determine whether a lawsuit is really going to be worth your time and money.

Where does he work? What's his work history like. If he has worked a minimum wage job for less than a year, then a wage garnishment is going to be ineffective. He's likely to just pick up and move across the street to the next minimum wage job. If he has a 10 year service record for a local employer, a wage garnishment may be a real possibility.

What about property? Does he have real estate that you could eventually put a judgment lien against? Does he have a number of cars, a boat, or other expensive property that you could put a lien against? Will he have money in the bank if you file a bank garnishment? When you're collecting on a judgment, remember that much of your debtor's property is going to be exempt from execution. A debtor of modest means will likely be able to keep his car, his house, and the contents of his house from creditors.

Who is in line before you? Does your debtor owe child support? Does your debtor owe taxes? Are there other lawsuits ahead of yours? Does he have any equity in his real estate, or is the mortgage debt equal to or more than the value of the property?

Finally, you may have all of your ducks in a row. You could win your lawsuit, file your lien, and commence with collection and the debtor could file for bankruptcy the next day. With a great number of debtors, a bankruptcy will shut you down. Your debtor will likely get to keep his assets and discharge your debt. And then the game is over.

Court Costs? What are Court Costs?

Whenever you do anything in the court system, you will find a lot of hands being thrust into your pockets. You will have to pay a filing fee to the clerk. You may have to pay a sheriff or process server to serve your lawsuit on your debtor. In Kentucky, your debtor may also be served by certified mail. At the very least, you will incur those two costs when you file your lawsuit. These costs alone usually run over $100.00 and could approach $200.00 in some cases. If you are successful in your lawsuit, the court will award these costs back to you. You will then have to attempt to collect these costs, along with the judgment awarded.

Many collections cases in court result in default judgments. The debtor doesn't defend the lawsuit, and the creditor is awarded judgment by default. In other cases, where the defendant defends the suit, you face other costs of litigation. These may include the cost of depositions, and copies of deposition transcripts. These can run into the hundreds of dollars. If you have to hire an expert witness, that could cost money. The case may be referred to a commissioner, a mediator, or a court-appointed expert. You might incur a fee from any of these people. Then there are costs of photocopies, postage, faxes, parking at the court house, and taking time away from your work to prosecute your case.

There is also the chance of escalating your disagreement with your debtor. Your debtor may file a counterclaim against you. Even if the counterclaim is bogus, you might still incur expense in addressing the claim. Debtors may lash out in other ways as well. They may badmouth you to your customers. Sometimes they will even make a criminal complaint against creditors in retaliation for the lawsuit. Be careful.

I'm not trying to talk you out of suing to collect your accounts. I'm just trying to warn you of the potential costs. Think about this example:

Cheryl is a hard luck case. She really needs a widget, but she can't qualify for credit. She asks you if she can have a widget, and make monthly payments. You say, sure. She stops after the second payment. You look at her situation and determine that it's not worth suing her for. After a couple of strongly worded letters, you write it off. Meanwhile you are getting an influx of Cheryl's friends coming into your store. Apparently, you have gotten the reputation for being "cool" in regard to accepting payments. She has told her friends that you will work out payment with them, and you won't do anything if they simply stop paying. Business of this kind will send you to the poor house. You need to change your image. It may be advisable to sue Cheryl for collection of her account-even if you know she won't ever satisfy the judgment. It's probably better, however, to get the reputation of getting paid up front on all transactions.

Attorney Fees:

"If we win the lawsuit, I can get the debtor to pay your fees back, right?" That question always comes up from the creditors. As I stated in the previous chapter, recovery of attorneys fees is not normally awarded to the creditor, even if he prevails in his lawsuit. If your debtor hasn't expressly agreed, in writing, to pay your attorney's fee, you will have to pay that yourself. An attorney's fee might be a quarter to a third of the value of the account, give or take. That could be a pretty sizeable chunk.

In Kentucky, cases involving $1,500.00 or less can be brought into small claims court. You will not need a lawyer in Small Claims court. The pleadings are made on standard fill-in-the-blanks forms. The rules of procedure and evidence are relaxed, and the hearing is less formal. Watch "The People's Court" or "Judge Judy" and you'll get the gist.

In many cases you can represent yourself in divisions other than Small Claims. However, it is not advisable. While it is possible for a litigant to get up to speed and learn the laws, rules and procedures necessary to win a lawsuit, a failure to understand proper law and procedure could mean dismissal of your lawsuit or other sanctions. If you attempt to represent yourself in court, you will be held to the same standard as members of the bar. Ignorance or inexperience will not be an excuse. The court won't help you or advise you.

One not of caution: In small claims court in Kentucky, a representative of a corporation or limited liability may represent the company without an attorney. Outside of Small Claims court, that's not the case.

Example: Mary is very intelligent. She took business courses in school, started her own business, filed incorporation papers, and build a successful business. She studied collection law, and is satisfied that she knows how to file a lawsuit, and successfully litigate. She files a lawsuit against one of her debtors in Circuit Court. There is no small claims division in the circuit court, but she is satisfied that she has met every procedural and technical requirement of the court. She is wrong. Even though she is the sole shareholder, officer, director and employee of her corporation, and even though the corporation is based in her home, it is still an entity separate from Mary the individual. If Mary undertakes to represent her corporation, she is representing a client without having been admitted to the state Bar as a licensed attorney. Even though Mary thought she was doing everything right, her lawsuit could be dismissed, as it was improperly filed by a person who is not an attorney. In fact, Mary has technically committed the crime of practicing law without a license-although as a practical matter, the court will likely dismiss her lawsuit and tell her not to do it again.

Conclusion:

If your debtor won't pay his bills after invoicing and dunning, you may wish to file a lawsuit. Make sure that the anticipated recovery from the lawsuit is worth your cost and effort in pursuing it. There are real costs involved in suing your debtors, which you may or may not get back in the end. Can you find your debtor? Can your debtor satisfy the judgment? Are there other creditors before you? Is the debtor likely to file a bankruptcy? Look at all of these variables in your decision to sue.